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Capital Structure and a Firm's Workforce

Author

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  • David A. Matsa

    (Kellogg School of Management, Northwestern University, Evanston, Illinois 60208, USA)

Abstract

While businesses require funding to start and grow, they also rely on human capital, which affects how they raise funds. Labor market frictions make financing labor different than financing capital. Unlike capital, labor cannot be owned and can act strategically. Workers face unemployment costs, can negotiate for higher wages, are protected by employment regulations, and face retirement risk. I propose using these frictions as a framework for understanding the unique impact of a firm's workforce on its capital structure. For instance, high leverage often makes managing labor more difficult by undermining employees’ job security and increasing the need for costly workforce reductions. But firms can also use leverage to their advantage, such as in labor negotiations and defined benefit pensions. This research can help firms account for the needs and management of their workforce when making financing decisions.

Suggested Citation

  • David A. Matsa, 2018. "Capital Structure and a Firm's Workforce," Annual Review of Financial Economics, Annual Reviews, vol. 10(1), pages 387-412, November.
    • Handle: RePEc:anr:refeco:v:10:y:2018:p:387-412
    DOI: 10.1146/annurev-financial-110716-032519
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    Citations

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    Cited by:

    1. John R. Graham & Hyunseob Kim & Si Li & Jiaping Qiu, 2019. "Employee Costs of Corporate Bankruptcy," NBER Working Papers 25922, National Bureau of Economic Research, Inc.
    2. Baghai, Ramin & Silva, Rui & Vig, Vikrant & Thell, Viktor, 2020. "Talent in Distressed Firms: Investigating the Labor Costs of Financial Distress," CEPR Discussion Papers 14383, C.E.P.R. Discussion Papers.
    3. YunGuo Liu & Minghui Zheng & Yue Xu & Sujuan Xie, 2023. "Deleveraging for talents: Human capital reliance and corporate leverage," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(5), pages 4823-4847, December.
    4. Borisov, Alexander & Ellul, Andrew & Sevilir, Merih, 2021. "Access to public capital markets and employment growth," Journal of Financial Economics, Elsevier, vol. 141(3), pages 896-918.
    5. Cao, Zhangfan & Rees, William & Zhang, Zhifang, 2023. "The effect of real earnings smoothing on corporate labour investment," The British Accounting Review, Elsevier, vol. 55(6).
    6. Kostøl, Andreas Ravndal & Merkle, Matthew C. & Grindaker, Morten, 2024. "Layoff Costs and Learning about Employer Financial Distress," IZA Discussion Papers 17340, Institute of Labor Economics (IZA).
    7. Ramin P. Baghai & Rui C. Silva & Viktor Thell & Vikrant Vig, 2021. "Talent in Distressed Firms: Investigating the Labor Costs of Financial Distress," Journal of Finance, American Finance Association, vol. 76(6), pages 2907-2961, December.
    8. Whited, Toni M, 2019. "JFE special issue on labor and finance," Journal of Financial Economics, Elsevier, vol. 133(3), pages 539-540.
    9. Jancenelle, Vivien E., 2021. "Tangible−Intangible resource composition and firm success," Technovation, Elsevier, vol. 108(C).
    10. Hossain, Mohammed Sawkat, 2021. "A revisit of capital structure puzzle: Global evidence and analysis," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 657-678.

    More about this item

    Keywords

    leverage; corporate debt; unemployment; labor bargaining; employment protection; pensions;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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